Wednesday, November 07, 2012

When the president forced GM and Chrysler into bankruptcy court, the White House's auto task force used the process to execute a prearranged reorganization it had masterminded with political allies. By contrast, Mr. Romney called for a true bankruptcy, in which creditors and stakeholders negotiate reorganization together, with the government merely providing the minimum support needed to prevent disorderly liquidation. In retrospect, Mr. Romney's approach not only would have produced outcomes superior to the president's, it was actually the braver course of action.
To understand why, it is necessary to examine GM and Chrysler's behavior in the weeks and months that preceded their bailouts. Thanks to inept management and a rapacious union, GM and Chrysler had been shedding market share and jobs for decades before the credit crunch of 2008 brought the global economy to its knees. Despite rocky shores and rough waters, the managements of GM and Chrysler and their United Auto Workers partners never imagined they would have to pay the true cost of their failure to compete.
In fact, when Mr. Romney's op-ed was published in November 2008, the leaders of both GM and Chrysler were insisting that "bankruptcy is not an option," because they were sure nobody would buy a car from a bankrupted company, despite both having already repeatedly begged Congress for a government bailout. Industry watchers later discovered that, despite an emergency transfusion from the Bush administration, the auto makers never prepared contingency plans before President Obama decided to initiate a bailout and reorganization.
This failure to prepare bankruptcy plans was more than inexcusable mismanagement, it was akin to blackmail. Without responsible preparations in place for a worst-case scenario, GM and Chrysler could argue that unless the government intervened they wouldn't be able to secure financing for a bankruptcy in the necessary time frame. They would have to liquidate their holdings and assets, which would jeopardize if not crush America's entire auto-manufacturing supply chain.

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The White House auto task force pushed a dealership cull on the auto makers that eliminated over 2,000 GM and Chrysler dealerships, forcing tens of thousands of Americans onto unemployment rolls, all with no appreciable benefit to either company.
Making matters worse, the Treasury Department issued notices which let "New GM" acquire $45 billion in tax write-offs from its defunct predecessor, a blatant violation of basic bankruptcy law. This not only deprived the government of billions in tax revenue, it hid the true cost of the bailout while disproportionally benefiting the UAW, an unsecured creditor.
By giving the UAW's unsecured claims against GM and Chrysler a higher priority than those of secured creditors, the government's reorganization further damaged bankruptcy precedent. The net result was a $26 billion transfer to a key Democratic ally and political donor, according to analysis by scholars from the Heritage Foundation and George Mason University.
GM and Chrysler could have averted tens of thousands of lost jobs, and the government could have preserved billions of dollars in tax revenue, by undergoing a true bankruptcy reorganization, even if the government had provided full debtor-in-possession financing.
In a true bankruptcy guided by the law rather than by a sympathetic, rule-bending political task force, GM and Chrysler would have more fully faced their competitive challenges, enjoyed more leverage to secure union concessions, and had the chance to divest money-losing operations like GM's moribund Opel unit. True bankruptcy would have lessened the chance that GM and Chrysler will stumble again, a very real possibility in the brutally competitive auto industry.